As one of the first startups to challenge the dominance of Britain’s high-street banks, Monzo bet big on mobile banking.
Monzo expertly capitalized on consumer dissatisfaction with mainstream banks and saw strong initial growth after launching in late 2015. It did so by identifying major pain points that consumers hated most about commercial banks and by offering a smart, tech-savvy alternative that more closely aligned with how those consumers managed their money.
Despite its strong growth and loyal following, it hasn’t all been smooth sailing for Monzo. The COVID-19 pandemic put the brakes on Monzo’s plans to expand into the American market and forced the bank to diversify its revenue streams beyond the interchange fees that have long been Monzo’s bread and butter. However, Monzo has weathered the pandemic’s economic challenges and is poised to continue growing into 2021 and beyond.
Here’s what fintech leaders can learn from Monzo and its remarkable journey.
Understanding your target market intimately is critical
One of the smartest moves Monzo made was leveraging millennials’ dissatisfaction with mainstream banks.
When Monzo (which was initially known as Mondo) launched its prepaid debit card in the U.K. in late 2015, online banking was certainly nothing new. Many major high-street banks offered a mobile app, and in terms of feature parity, there was little to differentiate Britain’s retail banks from one another at the time.
What set Monzo apart was how well it aligned with the ways millennial consumers managed their money. In the years following the financial crisis of 2008, many consumers had adopted a more cautious approach to personal finance. Younger consumers, in particular, were distrustful of commercial banks. Data from the Millennial Disruption Index 2015 revealed that 71% of millennial consumers would rather go to the dentist than listen to banks’ marketing messaging, and one in three were open to the idea of switching banks in the next 90 days. Mainstream banks were so unpopular with millennials that roughly one-third of respondents said they didn’t believe they’d need a bank at all in the near future.
Monzo promised a more transparent, social banking experience that would meet millennial consumers where they were.
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There were two sides to the product initially: a prepaid debit card and the Monzo mobile app, which came shortly afterward. Monzo’s cards were easily identifiable, thanks to their hot-coral color, which set them apart from other cards. The app introduced many features that have since become common across the fintech space. This included custom notifications based on users’ account activity and automated savings goals driven by machine-learning algorithms.
Initially, the company’s customer base was around 5,000 prepaid debit-card users. During the 14-month period from late 2015 until early 2017, Monzo grew to roughly 100,000 users, driven entirely by Monzo’s referral engine. This was another smart move. With dissatisfaction among banking consumers so high, leveraging word-of-mouth referrals to drive user growth was a shrewd move that utilized social proof to excellent effect.
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Monzo took a similarly social approach to developing its mobile app. The company created a vibrant community around its app by encouraging users to post ideas for specific features in official forums. This may not seem particularly radical, but in commercial banking, this kind of feedback loop was virtually unheard of prior to Monzo. This community engagement helped users feel heard and allowed them to suggest features that had real utility in their daily lives.
The company maintained its commitment to openness and transparency by making its product road map publicly accessible via a Trello board in May 2016. This enabled existing and prospective users to stay up to date on forthcoming feature releases. Monzo also held in-person events to drive awareness and increase user engagement and utilized targeted outreach via brand ambassadors to connect with prospective users.
Monzo’s initial success can be attributed almost entirely to the company’s keen understanding of its target market and the limitations of digital banking products offered by incumbent banks. Monzo recognized that offering a more personalized, rewarding experience was key to appealing to millennial financial consumers. Monzo also understood that genuinely putting the consumer first was crucial to making inroads into a sector traditionally hostile to newcomers.
Paid customer acquisition can be effective—but expensive
Until 2018, Monzo’s growth was almost entirely organic, driven primarily by the product’s strong referral engine. That changed in 2018, when the company shifted its approach to prioritize rapid growth at scale.
Monzo’s goal from early 2018 onward was to leverage its strong initial growth with significant marketing spend to aggressively pursue market share in the retail banking sector, which has a large total addressable market (TAM). The company would then translate that market share into lasting dominance and sustained profitability. This strategy is similar to that of transportation giant Uber, which adopted this approach to make strong gains in its share of the growing ride-hailing market between 2011 and 2015.
By early 2018, Monzo had approximately 500,000 users, almost all of whom the company had acquired organically via referral, and was attracting between 50,000 and 100,000 new users every month. Over the next 24 months, Monzo embarked on several paid campaigns to “supercharge” its user acquisition.
Image via Marketing Week
First, the company expanded its marketing team in late 2018, from around six people to a team of 20. Next, Monzo launched a relatively small ambient media campaign on subway trains operating in the London Underground network. After that, Monzo launched a major nationwide TV ad campaign that ran in early 2019, which resulted in a spike of new users who took Monzo beyond 2 million active users by mid-2019.
By Q3 2019, Monzo had approximately 3 million users and would surpass 4 million just a few months later. While the company’s ad spend had attracted new users, the costs of doing so had also increased dramatically––Monzo spent 600% more on marketing in 2019 than it had in 2018.
Keeping customer acquisition costs (CACs) down is one of the biggest challenges facing any fintech startup. Monzo’s initial referral engine was a smart play because it kept CACs extremely low during what was arguably Monzo’s most crucial growth phase. It’s also an outlier in the fintech space; very few fintech products have leveraged social distribution as effectively as Monzo has. The real challenge for Monzo was scaling its customer-acquisition efforts, which practically demanded a shift from organic word-of-mouth referrals to paid acquisition.
Another challenge that faced Monzo was maximizing the impact of its growth budget. Unlike incumbent banks, which often have millions of customers and sizable marketing budgets, fintech startups have to be able to target prospective customers efficiently and serve the needs of those customers profitably.
In May 2019, Monzo launched a major nationally televised ad campaign in the U.K. The bank produced four separate ads highlighting how easy it was to open a Monzo account, as well as some of the app’s most popular features.
Relying on a single revenue stream can be risky
Initially, the majority of Monzo’s revenue came from interchange fees—small charges levied by banks on transactions made by debit and credit cards.
Interchange fees are big business for major banks. Generally, interchange fees are lower in Europe than they are in North America, with European rates averaging around 0.96% compared to the 1.76% levied in Canada and the United States. Some banks earn billions of dollars from interchange fees alone, making it a highly lucrative revenue stream. Monzo collects interchange fees of 0.2% on transactions made by its 4.8M customers and earned £67.2M in revenue from interchange fees in 2019––a huge increase over the £19.7M in revenue Monzo generated in 2018.
However, interchange fees represented a critical vulnerability as well as a considerable opportunity for Monzo. Revenue streams based on interchange fees rely on people making purchases using their credit or debit cards. As the COVID-19 pandemic tightened its grip on economies around the world, millions of people made fewer card transactions, which resulted in significant losses.
Image via Sanjeev Kumar/WhiteSight
Monzo has diversified its product offerings in recent years to minimize its dependence on interchange fees as a revenue stream. Monzo’s lending arm expanded considerably from 2019 to 2020, and the company also recently began offering premium business accounts for £5 per account holder, per month. Monzo now has more than 60,000 business account holders, an increase of more than 35,000 new users since June 2020. In addition, Monzo also has more than 100,000 Monzo Plus and Monzo Premium customers.
One obstacle Monzo has yet to overcome, however, is how to convince users to turn their backs on commercial banks once and for all. As of 2019, fewer than one-third of Monzo’s British customers were using Monzo as their primary bank account, suggesting that a majority of users maintain Monzo accounts alongside traditional current accounts. Monzo’s features may be popular with younger financial consumers, but the economic volatility caused by COVID-19 may persuade many consumers to stick with the perceived security and stability of high-street banks for some time yet.
The rise and stall of Monzo
Monzo is a strong product with a loyal following. Beyond its popularity with consumers, Monzo has also managed to retain the confidence of investors. Monzo’s recent £60M funding round proves that investors are still bullish on Monzo’s prospects, even in the wake of the disruption caused by the COVID-19 pandemic. The fact that Monzo has raised £125M in funding since the start of the pandemic suggests that investors remain confident in Monzo’s potential and still see alternatives to mainstream banks as viable investment vehicles.
The bank has also demonstrated that, despite having much less room for error than mainstream banks, fintech startups are still well-positioned to respond and adapt to quickly changing market conditions. The biggest challenges facing Monzo over the next 12 months will be how quickly the bank can close the gap between its revenue and its losses and how well it can persuade new customers to turn their backs on commercial banks for good.